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9

Mezzanine Products and the World of the Rating Agencies and Accountancy Boards

9.1 RATING AGENCIES AND THE DEBT-EQUITY CONTINUUM

The world of the rating agencies and their output has undeniably been subject to much scrutiny around the globe ever since the start of the financial crisis in 2008. From the looks of it, everything has been said about the good, the bad and the ugly in this context, and that is a good thing because it means I can skip that part and focus on the particularities of the rating agencies' approach and methodologies towards mezzanine products and hybrid capital in general.

A credit rating evaluates the creditworthiness of an issuer of specific types of debt, specifically debt issued by a business enterprise such as a corporation or a government. It is an evaluation of the debt issuer's likelihood of default1 made by a credit rating agency.

It took a while for the credit agencies to come up to speed on hybrid capital, as their initial methodologies were not naturally tuned in to this phenomenon. Other factors which have contributed to the rise of hybrid capital and the need for rating agencies to come up with some sort of comprehensive model to evaluate these products were:

Improved structuring and rating criteria clarification.

Liquid market and low interest rates – ‘yield hungry investors’.

Equity accounting treatment possible under IFRS.

Increasingly supportive legal and tax systems.

Multiple issuer objectives.

Also, the drivers which were already known ...

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